Conquer The Trading Demons: Fear and Greed

Most people who get into trading seem to be attracted by the lure of making big money and making it fast . . . or so it would seem by the pitches and promotions from vendors that offer services or products that promise to deliver what traders are seeking.

Greed is a great motivation for becoming involved in trading. There’s nothing wrong with that because a lot of things would not be accomplished without some element of greed to provide incentive.

But greed often overreaches reality and the limits of a trader’s account and ability, producing more risk than the trader can handle. Then another demon, fear, often takes over and prevents the trader from capitalizing on potential opportunities when they do appear.

For example, greed tells me to buy into the current stock market rally because it may be the bull market of a lifetime; fear tells me the market is overbought and due for sharp correction. If only the emotional demons of greed and fear could be conquered . . .

PLAN TO WIN BUT EXPECT TO LOSE

That is, set up a strategy designed to win – there are lots of ways to do that, depending on the trader’s style, size of account, condition of the market, etc. Plan the trade; trade the plan. Be a little greedy. But be prepared for a worst-case scenario. Everyone knows markets can be a little perverse at times, not unfolding as expected. Panic is not a good environment for sound trading decisions.

So how can you reduce the effects of greed and fear as a trader? Here is my brief take:

o Trade small, especially if you are a beginner. I like to sell options near expiry . Greed says it’s hardly worthwhile to sell Nifty Options trading at Rs 5 and collect the premium Rs 5 per lot Many traders get into trouble and become acquainted with the fear demon because they haven’t considered risk exposure when they take positions that are too large for their accounts.

oExpect to lose when you enter a trade but define the limit you are willing to lose. Don’t waffle if the market reaches that point.

o By the same token, what amount of profit is enough to satisfy you on a given trade? The trading adage is “let profits run,” but taking a profit or at least reducing the size of your position can give you some confidence and alleviate greed/fear concerns.

o Trade with a shorter time horizon. You may not be an intraday trader, but a shorter-term perspective in today’s market environment provides quick feedback about your analysis and can reduce the time you are exposed to the vagaries of the marketplace.

o Trade only with money you can afford to lose without affecting your lifestyle. It’s bad enough dealing with the greed and fear demons without having the guilt of telling a spouse you lost the rent or grocery money trading.

o Balance “nothing ventured, nothing gained” – that is, be a little greedy – with “you don’t have to trade” – that is, fear and respect for what a market can do – to come up with a trading style that reduces the influence of those greed/fear demons and is comfortable for you.

All the views and contents mentioned in this site are merely for educational purposes and are not recommendations or tips offered to any person(s) with respect to the purchase or sale of the stocks / futures. I do not accept any liability/loss/profit occurring from the use of any content from this site. All readers of this site must rely on their own discretion and consult their own investment adviser.